How Far Can Servers Carry Cisco?

Cisco’s second-quarter earnings and warning of a “transition period” have investors worried, but there is one very bright spot on which Cisco might be able to hang some of its hopes: servers. While high-end switches are losing ground, Cisco’s Unified Computing System revenue grew 700 percent year over year and now have an annual run rate of $650 million. Obviously, Cisco can’t sustain that server-business growth rate forever, but at under two years old, it has plenty of room to grow and bolster the bottom line.

An illustration of UCS’s popularity is Cisco’s announcement today that it has signed up its 500th UCS customer — in Europe alone. I haven’t seen a customer count in North America, but the revenue spike and the customer announcements suggest it’s getting up there, too. Service providers are signing up for sure: Cisco UCS is the foundation of Savvis, Computer Sciences Corporation and NaviSite cloud offerings. Other customers run the gamut from construction giant Perini to agribusiness leader Monsanto to a number of regional hospital systems.

A somewhat distinct channel for UCS also comes from the VMware-Cisco-EMC Virtual Computing Environment alliance, which sells VBlock appliances based upon Cisco’s UCS server platform. VMware has been forthcoming about VCE traction, recently citing 100 customers at an average of $2.5 million per deal, with a 40 percent-per-month growth rate. One recently public customer is SunGard, which built its new Enterprise Cloud Services offering atop a VBlock foundation. However VCE revenues factor into Cisco’s bottom line, they likely are adding up fast.

There also are Cisco’s cloud computing efforts, of which UCS is arguably the foundational element. Cloud-centric switches are growing in revenue despite declining overall switch revenue, and Cisco expanding into new areas that could prove profitable, such as network virtualization with its LineSider acquisition and cloud software via its new partnership with the open source OpenStack project. And let’s not forget the persisent rumors, however far-fetched, that Cisco will make a play to buy EMC and/or its share of VMware to bolster its server revenues with storage and software income. Cisco’s cloud computing ace in the hole is cloud CTO Lew Tucker, who has proven his cloud worth at Salesforce.com and Sun Microsystems, and might be able to bring Cisco’s cloud strategy more in line with the world outside of expensive networking gear.

Despite all the promise, however, Cisco is still just a small player in the server world, and servers are still just a small part of Cisco’s overall business. IDC predicts a $53 billion server market this year, of which Cisco’s projected $650 million is just a small fraction. And Cisco itself did $40 billion in net sales during its fiscal year 2010. It will take a lot of growth, indeed, for servers to become a major revenue driver for Cisco, but their trajectory has been solidly moving upward in the relatively short time they’ve been shipping, and more companies looking at virtualization and private clouds means UCS will be getting even more looks. Another year of 700 percent growth would put the run rate at $5.2 billion, which would have Cisco’s server business creeping toward 10 percent of the overall server business and Cisco’s annual revenue.

It’s probably a good sign that Cisco acknowledges the need for a transition, but pulling it off will be tough. Cisco is an old dog that appears to have learned some new tricks, but the proof of that isn’t in yet. If it can align its server and greater cloud data center strategy with market desires and avoid becoming to those markets what, well, Cisco is to legacy networking gear, that could go a long way toward a smooth transition.